Capital Taxes and Trusts

CGT rates of tax

For individuals capital gains continue to be treated as the top slice of income. For 2006/07 rates continue to be aligned with those applying to savings income. Tapered gains are charged at 10% where gains plus total income do not exceed £2,150; 20% between £2,151 and £33,300; and 40% on any balance.

For trustees the rate of CGT is 40%.

Inheritance tax (IHT) threshold

The IHT nil rate band is increased to £285,000 with effect from 6 April 2006. The Chancellor has announced that the band will rise to £300,000 in 2007, £312,000 in 2008 and £325,000 in 2009.

Comment

It is disappointing that little attempt was made to increase the nil rate band to reflect recent rises in the housing market. The family home remains the main asset in many estates and some IHT planning should be considered if the value of the estate exceeds the nil rate band.

Planning Gain Supplement (PGS)

The government has issued a consultation paper on the introduction of a PGS. Legislation may be introduced to tax some of the windfall gain accruing to landowners from the sale of their land for residential development to capture some of the uplift in value arising when full planning permission is granted.

The following are some of the principles that may be considered:

• a system for gathering information as to the value of land proposed for development
• the government would then set a tax rate on these values, to be paid by the developer
• the granting of residential planning permission would be contingent on the payment of the PGS
• there may be a lower rate for development on brownfield sites
• consideration may be given to allowing developers to pay their contributions in instalments over a period of time.

The government recognises that the introduction of a PGS would need to be accompanied by transitional measures. These would help developers already engaged in land sales contracts that were drawn up before this charge was introduced or those who hold large amounts of land where planning permission has yet to be secured.

Trusts

A package of measures to modernise the tax system for trusts will be included in the Finance Bill 2006. The rationale of the measures is to make the taxation of trusts more consistent across the income tax and CGT regimes.

Examples of the changes include:

• common meanings of ‘settled property’ and ‘settlor’ to apply for most income tax and CGT purposes
• rules to allow for the income of settlor-interested trusts to be treated as though it had arisen directly to the settlor
• a measure to legislate the existing practice of not taxing beneficiaries who receive discretionary income payments from the trustees of settlor-interested trusts
• an increase in the standard rate band for trusts from £500 to £1,000 from 6 April 2006.

Work is continuing on other measures in particular:

• provisions to allow income to ‘stream’ through a discretionary trust so that the beneficiary would meet any higher rate tax bill directly
• abolition of the ‘tax pool’ (this proposal is dependent on changes to an income streaming approach).
  
  

Comment

The measures are part of an ongoing process of reform which should help to reduce the administrative burdens on trustees, especially the trustees of smaller trusts. However the common meanings of settled property will not apply to inheritance tax and the more significant changes such as income streaming have been deferred.

Aligning the IHT treatment of trusts

Lifetime transfers into accumulation and maintenance trusts or interest in possession trusts are generally exempt from IHT if the settlor lives for the next seven years. Also these trusts are not subject to the periodic or exit charges suffered by other trusts.

Legislation will be introduced in the Finance Bill 2006 which will limit these special rules to trusts that are created:

• either on death or in the settlor’s lifetime for a disabled person; or
• by a parent on death for a minor child who will be fully entitled to the assets in the trust at age 18; or
• on death for the benefit of one life tenant in order of time whose interest cannot be replaced (more than one such trust may be created on death as long as the trust capital vests absolutely when the life interest comes to an end).

These rules will apply to trusts created on or after 22 March 2006 and, from the same date, to additions of new assets to existing trusts. Subject to transitional provisions the rules may apply to other IHT-relevant events in relation to existing trusts.

Comment

These are significant changes. For new trusts lifetime transfers into a trust are no longer eligible for special treatment unless they are set up for a disabled person. All other transfers are immediately chargeable.